FAS 157 fair value - NEO gets Mr. Smith in Part 1

Just a couple of days back, i had commented on the SEC's move to change fair value accounting. This move was short changed with the bailout package being rejected.

Well on numbers, this is what fair value accounting has done so far since its inception in Dec 07.

Citibank announced a further $15-21BN write down for estimated Q3 on its distressed assets.

Morgan stanley wrote down $3BN in its Q3 earnings (not so bad as many expected $6BN)

Bank analysts predicted total write downs in excess of $64B on collateralised debt obligations from all investment banks.

Now with the bailout package being approved, heres what the SEC has proposed for Q3 reportings, which could just about reverse some of the write downs and infuse life into the financial statements

• Mark to Marking of assets and liabilities in inactive markets can now be done on the aandy dandy mathematical models instead marking them on the exit prices or fire prices in illiquid markets - which means auditors and accountants go back to reading more of CON 7

• SEC has allowed managements to use their internal assumptions in fair value accounting while maintaing the hieracy of using fair value techniques.

The crux of the SEC statement is primarily aimed at ensuring distressed assets are not marked to market in inactive markets at throwaway prices.  The concept of a fair value measurement assumes an orderly transaction between market participants. An orderly transaction is one that involves market participants that are willing to transact and allows for adequate exposure to the market. Distressed or forced liquidation sales are not orderly transactions, and thus the fact that a transaction is distressed or forced should be considered when weighing the available evidence. 

To make matters interesting, the US BIG ACCOUNTING FIRMS, which all along were silent on the rejection of the $700BN bailout package, were opposing congress efforts and were gearing to lobby to scrap the changes in the mark to market rules.